Demonetisation effect on Home Loans was seen from Jan-1st-2017, when SBI made a announcement of it’s forth-Night MCLR rate coming down to 8.00% from 8.90% and Home Loan rate from 9.00% to 8.50% itself shows demonetisation effect was positive on Home Loan rate. But, did you miss something, I am sure you have missed it.
MCLR had reduced from : 8.90% to 8.00% : reduced by 0.90%
Where as Home Loan rate has reduced by only 0.50% (9.00% – 8.50%) where did the remaining 0.40% go.
Who is taking that extra 0.40% , when its not passed on to the new home loan rate ?
What most of the banks have done is they have increased there margins from 0.10% to 0.60%.
Now let me go into more details about, was demonetisation a benefit or loss to new Home Loan Seekers and existing customers.
Let me explain in detail, Before I tell you, why customer who had taken home loan in Dec-2016 is better rate then post demonetisation. First I would recommend how MCLR is calculated to understand why MCLR had reduced due to demonetisation and now I would like to explain, how the home interest rate is set by banks.
Interest rate consist of 2 components.
Interest Rate = 1-Year MCLR Rate + Margin Rate
Recent announcement was : 1-year MCLR Rate : 8.00 %
Margin Rate was : 0.60 %
So effectively the Interest rate was set to 8.60 % = 8.00 % + 0.60 %
Prior demonetisation was 9.00% = 8.90%(1-year MCLR) + 0.10% (Margin Rate)
What is 1-year MCLR ?
When we avail a loan with 1-year MCLR, it’s 1-year Fixed loan. Which means any changes in MCLR during that 12 months, your home loan will not be affected. For example if you availed home loan in Dec-2016 your interest rate change will be only in Dec-2017. So any change , decrease of MCLR or increase of MCLR, your home loan rate will not change during this 12 months. In Dec-2017 your home loan rate will get updated based on the 1-year MCLR during Dec-2017. Again next change will be next year Dec-2018 and this would continue till closure.
What is the Margin Rate ?
Margin Rate is what Banks take as the operational costs. It gets fixed when you have taken. For example if you had availed home loan in Dec-2017 your home loan should have been 9.00% (8.90 + 0.10) your margin should be only 0.10 %. So your Interest rate would be 1-year MCLR + 0.10% for ever.
Now let’s compare your home loan with the new rates
|Year||1-Year MCLR||Customer who had taken in Dec-2016 time frame.||Customer who had taken in Jan-2017 time frame.|
|Dec-2016||8.90 %||9.00 % (8.90+0.10)||–|
|Jan-2017||8.00 %||–||8.60 % (8.00+0.60)|
|Jan-2018||If 7.50 % in Dec & Jan||7.60 %(7.50 + 0.10)||8.30 %(7.70 +0.60)|
|Jan-2019||If 8.60 % in Dec & Jan||8.70% (8.60 + 0.20)||9.05% (8.60 + 0.45)|
|Sep-2019||If 9.25 % in Sep & Jan||9.35 %(9.25 + 0.10)||9.85%(9.25 + 0.60)|
It would continue till the closure of the loan. What we are seeing right now is, Short term profit and long term loss. People who convert to new rate without the long calculation they would start to pay every year 0.50% more than December rate.
1-year-MCLR had decreased drastically only due to demonetisation. Hopefully we need not stand in long Queues every year. Mostly its once in lifetime event.
Instead of banks making profits due to demonetisation drive they should have passed on the benefits to the end customers.
Hope to see cut in the Margins in coming days. Happy home Loans.
This complex calculations and to understand what is long term profit & short term loss Vs short term profit with long term loss . Which one is better, to be left to the professionals. http://loanyantra.com is best at this. We will wait for the margins to come down, then we would recommend the right change that would ensure you save the most on your home loans…
Happy Home Loaning…